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Future Value: Definition,

Formula, How to
Calculate, Example, and
Uses
By JAMES CHEN Updated March 19, 2023

Reviewed by MICHAEL J BOYLE

Fact checked by PETE RATHBURN

Investopedia / Yurle Villegas

What Is Future Value (FV)?

Future value (FV) is the value of a current asset at a
future date based on an assumed rate of growth.
The future value is important to investors and
financial planners, as they use it to estimate how
much an investment made today will be worth in
the future.

Knowing the future value enables investors to

make sound investment decisions based on their
anticipated needs. However, external economic
factors, such as inflation, can adversely affect the
future value of the asset by eroding its value.

Future value can be contrasted with present value

(PV).

KEY TAKEAWAYS
Future value (FV) is the value of a current
asset at some point in the future based on
an assumed growth rate.
Investors are able to reasonably assume
an investment’s profit using the FV
calculation.
Determining the FV of a market
investment can be challenging because of
market volatility and uncertainty about
future investment conditions.
There are two ways of calculating the FV
of an asset: FV using simple interest, and
FV using compound interest.
Future value is opposed by present value
(PV); the former calculates what
something will be worth at a future date,
while the other calculates what
something at a future date is worth today.

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Understanding Future Value (FV)

The future value calculation allows investors to
predict, with varying degrees of accuracy, the
amount of profit that can be generated by
different investments. The amount of growth
generated by holding a given amount in cash will
likely be different than if that same amount were
invested in stocks; therefore, the future value
equation is used to compare multiple options.

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Determining the future value of an asset can

become complicated, depending on the type of
asset. Also, the future value calculation is based
on the assumption of a stable growth rate. If
money is placed in a savings account with a
guaranteed interest rate, then the future value is
easy to determine accurately. However,
investments in the stock market or other securities
with a more volatile rate of return can present
greater difficulty.

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To understand the core concept, however, simple

and compound interest rates are the most
straightforward examples of the future value
calculation.

Tip: You can use the future value

formula to calculate how your current
savings may turn into a home down
payment, car down payment, or funds
used to pay tuition.

Formula and Calculation of Future Value

Future Value Using Simple Annual Interest
The future value formula assumes a constant rate
of growth and a single up-front payment left
untouched for the duration of the investment. The
future value calculation can be done one of two
ways, depending on the type of interest being
earned. If an investment earns simple interest,
then the FV formula is:

F V = I × (1 + (R × T ))
where:
I = Investment amount
R = Interest rate
T = Number of years

For example, assume a $1,000 investment is held

for five years in a savings account with 10% simple
interest paid annually. In this case, the FV of the
$1,000 initial investment is $1,000 × [1 + (0.10 x 5)],
or $1,500.

Future Value Using Compounded Annual

Interest
With simple interest, it is assumed that the interest
rate is earned only on the initial investment. With
compounded interest, the rate is applied to each
period’s cumulative account balance. In the
example above, the first year of investment earns
10% × $1,000, or $100, in interest. The following
year, however, the account total is $1,100 rather
than $1,000; so, to calculate compounded
interest, the 10% interest rate is applied to the full
balance for second-year interest earnings of 10% ×
$1,100, or $110.

The formula for the FV of an investment earning

compounding interest is:

F V = I × (1 + R)T
where:
I = Investment amount
R = Interest rate
T = Number of years

Using the above example, the same $1,000

invested for five years in a savings account with a
10% compounding interest rate would have an FV
of $1,000 × [(1 + 0.10)5], or $1,610.51.

Important: Bearish about the market?

Future value can also handle negative
interest rates to calculate scenarios
such as how much $1,000 invested
today will be worth if the market loses
5% each of the next two years.

Pros and Cons of Future Value

Future value can be useful in some situations.
However, there are limitations to the calculation,
and it may not be suitable for use in some cases.

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Advantages of Future Value

Future value allows for planning. A company or
investor may know what they have today, and
they may be able to input some assumptions
about what will happen in the future. By
combining this information, people can plan
for the future as they understand their financial
position. For example, a homebuyer
attempting to save $100,000 for a down
payment can calculate how long it will take to
reach this savings by using future value.
Future value makes comparisons easier. Let's
say an investor is comparing two investment
options. One requires a $5,000 investment that
will return 10% for the next 3 years. The other
requires a $3,000 investment that will return
5% in year one, 10% in year 2, and 35% in year
3. The only way an investor will know which
investment may make more money is by
calculating the future values and comparing
the results.
Future value is easy to calculate due to
estimates. Future value does not require
sophisticated or real numbers. Because it is
heavily reliant on estimates, anyone can use
future value in hypothetical situations. For
example, regarding the homebuyer above
trying to save $100,000, that person can
calculate the future value of their savings using
their estimated monthly savings, estimated
interest rate, and estimated savings period.

Disadvantages of Future Value

Future value usually assumes constant
growth. In the formulas above, only one
interest rate is used. Although it is possible to
calculate future value using different interest
rates, calculations get more complex and less
intuitive. In exchange for a simplified formula
using only rate, a situation may have unrealistic
parameters as growth may not always be linear
or consistent year-over-year.
Future value assumptions may not actually
happen. Because future value is based on
future assumptions, the calculations are simply
estimates that may not truly happen. For
example, an investor may have calculated the
future value of their portfolio estimated the
market would return 8% each year. When the
market fails to produce that estimated return,
the future value calculation from before is
worthless.
Future value may fail at comparisons. Future
value simply returns a final dollar value for
what something will be worth in the future.
Therefore, there are some limitations when
comparing two projects. Consider this
example: an investor can choose to invest
$10,000 for an expected 1% return or can
choose to invest $100 for an expected 700%
return. Looking at only future value, the first
option would appear favorable because it is
higher; it fails to consider the starting point of
the initial investment.
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Future Value Pros & Cons

Pros
• Relies on estimates, therefore it is easy to
calculate.
• Future value calculations of lump sum or
simple cashflows may be easy to calculate.
• Future value can singlehanded determine
whether an investor meets a target or goal.
• The concept of future value can be applied to
any cashflow, return, or investment
structure.

Cons
• Relies on estimates, therefore findings may
be quickly invalidated.
• Future value calculations of annuities or
irregular cashflow may be difficult to
calculate.
• Future value by itself cannot be used to
compare and choose between two mutually
exclusive projects.
• Most future value models assume constant
rate growth which is often impractical.

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Future Value vs. Present Value

The concept of future value is often closely tied to
the concept of present value. Whereas future value
calculations attempt to figure out the value of
something in the future, present value attempts to
figure out what something in the future will be
worth today.

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Both concepts rely on the same financial

principles (i.e. discount or growth rates,
compounding periods, initial investments, etc.).
Each component is related and inherently feed
into the calculation of the other. For example,
imagine having $1,000 on hand today and
expecting to earn 5% over the following year.

Future Value: $1,000 * (1 +

5%)^1 = $1,050

The future value formula could be reversed to

determine how much something in the future is
worth today. In other words, assuming the same
investment assumptions, $1,050 has the present
value of $1,000 today.

Present Value: $1,050 / (1

+ 5%)^1 = $1,000

Therefore, by changing directions, future value

can derive present value and vice versa. The future
value of $1,000 one year from now invested at 5%
is $1,050, and the present value of $1,050 one year
from now assuming 5% interest is earned is
$1,000.

Annuity vs. Annuity Due

When calculating future value of an
annuity, understand the timing of when
payments are made as this will impact
your calculation. If payments are made at
the end of a period, it is an ordinary
annuity. If payments are made at the
beginning of a period, it is an annuity
due.

Example of Future Value

The Internal Revenue Service imposes a Failure to
File Penalty on taxpayers who do not file their
return by the due date. The penalty is calculated
as 5% of unpaid taxes for each month a tax return
is late up to a limit of 25% of unpaid taxes. An
additional Failure to Pay penalty can also be
assessed, and the IRS imposes interest on
penalties. [1]

If a taxpayer knows they have filed their return late

and are subject to the 5% penalty, that taxpayer
can easily calculate the future value of their owed
taxes based on the imposed growth rate of their
fee.

For example, consider if a taxpayer anticipates

filing their return one month late. The taxpayer
expects to have a $500 tax obligation. The
taxpayer can calculate the future value of their
obligation assuming a 5% penalty imposed on the
$500 tax obligation for one month. In other words,
the $500 tax obligation has a future value of $525
when factoring in the liability growth due to the
5% penalty.

Consider another example of a zero-coupon bond

trading at a discount price of $950. The bond has
two years left to maturity and has a target yield to
maturity is 8%. If an investor is interested in
knowing what the value of this bond will be in two
years, they can simply calculate the future value
based on the current variables. In two years, the
future value of this bond will be $1,108.08 ($950 *
(1 + 8%)^2). Through TreasuryDirect, the U.S.
Department of Treasury bond website, investors
can utilize calculators to estimate the growth and
future value of savings bonds. [2]

What Is Future Value?

Future value (FV) is a financial concept that assigns
a value to an asset based on estimated variables
such as future interest rates or cashflows. It may
be useful for an investor to know how much their
investment may be in five years given an expected
rate of return. This concept of taking the
investment value today, applying expected
growth, and calculating what the investment will
be in the future is future value.

How Do I Calculate Future Value?

There are several formulas to calculate future
value. In all of them, the concept is the same:
future value is calculated by taking cashflows and
projecting them forward based on anticipated
growth rates. Simple future value calculations
regarding a single lump sum are easier to calculate
(principal * (1 + rate) ^ periods), while future value
calculations of annuities, varying cash flows, or
varying interest rates are more complex.

What Is Future Value Used for?

Future value is used for planning purposes to see
what an investment, cashflow, or expense may be
in the future. Investors use future value to
determine whether or not to embark on an
investment given its future value. Future value can
also be used to determine risk, see what a given
expense will grow at if interest is charged, or be
used as a savings target to understand whether
enough money will be reserved given the current
pace of savings and expected rate of return.

What Is the Future Value of an Annuity?

The future value of an annuity is the value of a
group of recurring payments at a certain date in
the future, assuming a particular rate of return,
or discount rate. The higher the discount rate, the
greater the annuity's future value.

FV of an annuity is calculated as:

FV = PMT x [(1+r)n - 1)]/r

where:

FV = Future value of an annuity stream

PMT = Dollar amount of each annuity payment
r = The discount (interest) rate
n=
Number of periods in which payments will be made

How Is Future Value Different From

Present Value?
Future value takes a current situation and projects
what it will be worth in the future. For example,
future value would estimate the value of $1,000
today invested at 10% interest for 5 years.
Alternatively, present value takes a future
situation and projects what it is worth today. For
example, present value would estimate how much
money you would need to have today to invest at
10% for 5 years to end up with $1,000.

The Bottom Line

Future value (FV) is a key concept in finance that
draws from the time value of money: a dollar
today is worth relatively more than a dollar in the
future. Using future value, once can estimate the
value of that dollar at some point later in time, or
the value of an investment or series of cash flows
at that future date. In general, the future value of a
sum of money today is calculated by multiplying
the amount of cash by a function of the expected
rate of return over the expected time period.
Future value works in the opposite way as
discounting future cash flows to the present value.

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ARTICLE SOURCES

Related Terms
Present Value of an Annuity: Meaning,
Formula, and Example
The present value of an annuity is the current value of
future payments from that annuity, given a specified rate
of return or discount rate. more

Euler's Number (e) Explained, and

How It Is Used in Finance
Euler's number is a mathematical constant with many
applications in science and finance, usually denoted by
the lowercase letter e. more

Future Value of an Annuity: What Is It,

Formula, and Calculation
The future value of an annuity is the total value of a
series of recurring payments at a specified date in the
future. more

What Is Present Value in Finance, and

How Is It Calculated?
Present value (PV) is the concept that states an amount
of money today is worth more than that same amount in
the future. more

Fair Value: Its Definition, Formula, and

Example
Fair value can refer to the agreed price between buyer
and seller or the estimated worth of assets and
liabilities. more

Net Present Value (NPV): What It

Means and Steps to Calculate It
Net present value (NPV) is the difference between the
present value of cash inflows and the present value of
cash outflows over a period of time. more

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